Scott Sumner  

A few predictions (Nothing will change)

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A year from today everything will be much clearer. I'm not sure what will happen, and I'm not much of a forecaster, but I'll take a shot. I think the safest prediction one can make is that nothing will happen, or at least the things people expect to change, won't change very much. I'll focus on three issues, monetary policy, nationalism and neoliberalism.

1. I predict that monetary policy will become a hot issue at some time in the latter part of 2017. I base this on two factors; Janet Yellen's term will end in January 2018, and it's likely that some sort of economic policy will be put in place by then (perhaps corporate tax reform plus deregulation.) Attention will then turn to the Fed, and it's role in helping or hindering Trump from reaching his growth target.

My prediction is that Fed policy will not change. Trump may prefer a more dovish Fed, but I don't think he knows how to get it. "Fedborg" (i.e. the Fed establishment) will maintain the 2% inflation target, regardless of whether Trump reappoints Yellen or not.

2. Nationalism seems to be on the rise throughout the world. But I don't expect it to take hold in America.

There are two possible types of American nationalism. One type, dubbed "white nationalism" is associated with alt-right figures such as Steven Bannon. A second type might be called "patriotic nationalism" or "rainbow nationalism" depending on whether you are on the right or the left. It includes all Americans.

I don't think that white nationalism can succeed in America because the concept of racism is too discredited. The millennials are particularly opposed to discrimination and open to engaging with people of different races.

Patriotic nationalism is probably the sort of nationalism that Trump would claim to believe in (his actual statements are all over the map.) In this vision, the relevant "tribe" or "nation" is not white Americans, but rather all Americans---the whole rainbow coalition. This nationalism is about putting America's interests ahead of the rest of the world.

I see two problems with this sort of nationalism gaining much traction. First, people in America don't feel a strong tribal connection with others of different races and backgrounds. A white farmer or factory worker in Ohio probably feels more affinity for a white farmer or factory worker in Ontario, than for a black in Mississippi, or a Asian in Silicon Valley, or a Cuban-American in Miami. Strong nationalism is more likely to occur in countries where the "nation" and the "state" more closely coincide, such as Japan.

The second problem with patriotic nationalism is that to a much greater extent than Trump understands, America's interests coincide with the world's interests. Getting growth up to the 4% that Trump is looking for is more likely to occur with freer trade and an increased rate of immigration, especially highly skilled immigrants. We also benefit from NATO and the EU not falling apart. Yes, at the margin there are conflicts---we'd like NATO members to up military spending to 2% of GDP. But this is green eyeshades stuff, nothing to build a powerful nationalistic movement around.

3. As nationalism is on the rise throughout the world, neoliberalism seems to be on the decline. My prediction is that this decline will eventually be seen as a myth. Neoliberalism is not going anywhere. As an analogy, some thought the conservative wave that brought Reagan and Thatcher to power would "end welfare as we know it." There really was a conservative wave in the 1980s, but today the world's major economies spend just as much on social programs, if not even more than in 1980.

People often say that Trump is an unprecedented figure in American politics, at least since the days of Andrew Jackson. But of course if you look overseas you see that Trump is a very common type of politician, which frequently pops up in places like the Philippines, Venezuela, Argentina, Italy, etc.

But there's another way of thinking about the Trump phenomenon; consider the movement, not the personality of the leader. Here I'm thinking of the Syriza party in Greece, which took office basically promising to "drain the swamp" in Greece, i.e. it would govern in an entirely new way. That sounds like Trump. Of course we all know what happened next. Syriza threatened to blow up the eurozone if the northern Europeans weren't more reasonable. The northerners called Syriza's bluff, and the Greek government backed off. The northerners then demanded that the Greeks take their austerity, and the Greeks meekly obeyed. I don't think many Greeks view neoliberalism as a spent force---from their perspective it looks like a colossus that rules the entire planet, except a few outposts like North Korea, Cuba, and Venezuela.

I predict that neoliberalism may end up being something like the social welfare state in advanced economies---an immovable object that must ultimately be accommodated. We are too addicted to all that cheap Chinese stuff at Walmart. Trump will take a few pot shots at neoliberalism, which will cause hot-heated pundits (like my alter ego over at TheMoneyIllusion) to overreact and warn of the end of the golden age of globalization. But in the end Trump will back off and accommodate the establishment, just as he recently replaced General Flynn with a much more reasonable NSC head.

More specifically, in 4 years:

1. The US will still be accepting about one million immigrants per year.
2. Less than 15% of the illegals will have been deported.
3. Average tariff rates on US imports will not change very much. (Say less than 1 percentage point for this and the subsequent predictions)
4. The trade deficit won't change very much as a percent of GDP
5. Average GDP growth won't change very much from the past 4 years
6. Unemployment won't change very much from 4.8%
7. Labor force participation won't change very much 62.9%
8. The number of factory jobs won't change very much

But Trump will declare the economic carnage is over, and it will be "morning in America".

Screen Shot 2017-02-22 at 12.16.31 PM.png
PS. Just be glad that it won't be "mourning in America"!


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COMMENTS (14 to date)
Nicholas Weininger writes:

Interesting set of concrete predictions. Are you willing to either (a) put probabilities/confidence levels on them, Scott Alexander style, or (b) take bets on them, Bryan Caplan style?

Scott Sumner writes:

Nicholas, I'd say 60% confident, except perhaps the last item, which should have been stated as a share of GDP. The first item doesn't give a range, but say plus or minus 20% from current levels.

For items 2, 5, ands 6, I might be 80% confident.

Money? Isn't my reputation much more valuable than money? :)

Doug writes:

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E. Harding writes:

"We also benefit from NATO and the EU not falling apart."

-On the contrary, we are very much hurt by NATO and the failure of the EU to fall apart.

"But in the end Trump will back off and accommodate the establishment, just as he recently replaced General Flynn with a much more reasonable NSC head."

-I've seen absolutely nothing to suggest the new NSC head is more reasonable than Flynn.

America isn't Greece. It can make new rules for itself. Who's going to rule otherwise? China? Russia? India?

"The millennials are particularly opposed to discrimination and open to engaging with people of different races."

-Voters who are in their early 60s today mostly voted for McGovern. Most people who voted Remain in 1975 voted Brexit in 2016. The Internet has smashed the old walls restricting frank talk about racial issues. The Mississippi Republican primary shows no significant differences in candidate preference based on age.

Sadly, I don't think Fed policy will change, and I think a good deal of your economic predictions will prove correct. I think the economy overall might change, but it's unusually hard for me to tell in which direction.

"Getting growth up to the 4% that Trump is looking for is more likely to occur with freer trade and an increased rate of immigration, especially highly skilled immigrants."

-These might help on the margin, but the evidence for this being the case currently is sparse.

Steve Bannon is very much a rainbow nationalist figure.

AntiSchiff writes:

Dr. Sumner,

Perhaps you should amend your predictions to allow for the possibility of a recession over the next nearly 4 years, simply because they sometimes occur.

Postkey writes:

" . . . warn of the end of the golden age of globalization."

This 'golden age'?

' It’s true that the number of people living in ‘extreme poverty’, as defined, has sharply declined over the past three decades,  There are 721 million fewer people living in extreme poverty in 2010 compared to 1981 (assuming what $1.25 a day could buy in 1981 is the same as what it can buy now).  That sounds better, but this reduction is almost solely due a rise in living standards in the billion-plus populations of India and particularly China in the last 30 years.  There has been very little reduction in extreme poverty levels (as defined) in other very poor emerging economies.  While extreme poverty rates have declined in all regions, the world’s 35 low-income countries (LICs) – 26 of which are in Africa — registered 103 million more extremely poor people today than three decades ago.  Aside from China and India,“individuals living in extreme poverty [in the developing world] today appear to be as poor as those living in extreme poverty 30 years ago,” the World Bank said. '
https://thenextrecession.wordpress.com/2015/10/13/weve-never-had-it-so-good/

Anand writes:

The unemployment prediction is weird; shouldn't there be something like being at the same point in the business cycle? What if there's a recession?

shrikanthk writes:

It is very fashionable to keep stating that "racism" is discredited, though race is the foundation of most lives and most countries.

Why is Britain as a nation separate from France? Which in turn is separate from Germany? Race comes into it. You may argue - oh, it's not about race but language. But race has traditionally influenced language.

In our own private lives, race rules. I am a 33 year old single Indian professional working in NY. And I wouldn't dream of marrying a non-Indian. Does that make me racist? Maybe yes. Does that mean I believe in eugenics or race theories? No. Definitely not.

Inter-racial marriages are still fairly rare across the world. So race rules! Yet people pretend that we live in a post-racial society. It is a pretence to gain "social respectability".

It's a bit like claiming to be "For Animal rights and against cruelty towards animals" while munching a chicken everyday.

Lorenzo from Oz writes:

Not sure that patriotic nationalism is quite the non starter you seem to think. I don't believe racial identities are as strong as you seem to (and the US is in some trouble if they are). The US had no trouble being protectionist for many decades, and much of the point of the US public education system was to create little Americans.

That the US has a disproportionate benefit in a stable world order is true, and the basis of American foreign policy since 1941. The trouble is that a cultural disconnect has been overlaid over that plus some economic difficulties. Specifically, the extremely uneven distribution of benefits from growth, trade, migration and the globalisation package.

You can get people to accept quite a lot if they think that (1) they are not powerless (2) they are respected. Open, or even seriously leaky, borders migration policy does mean that voters don't get a say (which is important if that is your only way of getting a say). And there is a pretty serious cultural program of disrespect.

Especially given that the more "progressive" you are, the more you apparently believe that social outcomes are primarily driven by the malice of your fellow citizens. Not a basis for politics of respect.

President Trump has managed to make himself the personification of a sort of primal scream of frustration. As a political avatar, he has the features you complain about. But that does not mean there are not serious underlying problems in the political culture of the US which well pre-date him, but he was savvy enough to exploit.

If citizenship does not matter, then a lot of people really will be rendered powerless. And "but gains from trade" is not an answer, however true it might be.

That being said, I agree with your predictions. But the downward cultural spiral of polarisation that scholars such as Jonathan Haidt and Peter Turchin are concerned with, if it continues, will continue to breed political pathologies of various sorts.

And yes, if something can't continue, it won't: but there are lot of different ways that sort of downward spiral can stop, and some of them are really nasty. President Trump may be a buffoonish reversal of the first Republican President, but it is worth remembering that the first Republican President also came to power with nowhere near a voter majority in a time of intense political and cultural polarisation. Nor is it hard to find voices expressing a desire for a National Divorce, because they want to be left alone, or even seriously contemplating a profoundly violent outcome.

(And rich free traders, and their supporters, comfortable with globalisation were on the losing side of the first attempted National Divorce, as it happens.)

Scott Sumner writes:

Harding, The polls I've seen suggest that the young are much more open to diversity.

Not sure that "Steve Bannon" and "rainbow" should be in the same sentence, given that he opposes the immigration of Asians because it might change our culture.

Antischiff, I agree that a recession might occur. I'm simply offering what I think is the most likely outcome.

Postkey, That's like saying "Aside from by far the best thing that's ever happened in all of human history, what have you done for me lately?"

Seriously, I don't agree that extreme poverty reduction is confined to those two countries. Obviously they have almost 1/2 of the entire developing world's population, and they've done better than other developing countries, so in absolute terms they've seen the lion's share of improvements (due to their embrace of globalization). But there are lots of other developing Asian countries that have seen big gains, such as Indonesia and Vietnam.

Africa did poorly for many years with bad policies, but in the last decade has done better.

Anand, I just mean there's a 50% chance it is higher or lower than that figure. If there's a recession, it will be higher.

TravisV writes:

Excellent post!

Any predictions for whether Trump's Supreme Court changes will inflict significant pain on the poor, etc.?

Gene writes:

have people commented yet on your use of the word "illegals"? Isn't there a better way to communicate your meaning using real words? writing "illegal immigrants" isn't that much harder, and doesn't come of as a slur.

E. Harding writes:

@Scott Sumner
"The polls I've seen suggest that the young are much more open to diversity."

-The young are much more diverse. Remember to adjust for that. And, see my remarks above. I don't think you've ever properly responded to the point that people's views change as they age.

Steve Bannon isn't a fan of foreigners, but I've seen nothing to suggest he's not a rainbow nationalist.

Mike W writes:

Strong nationalism is more likely to occur in countries where the "nation" and the "state" more closely coincide, such as Japan.

I would think China is the more significant candidate...to US interests...for this.

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